China Hongqiao Group (SEHK:1378) Could Be 72% Below Fair Value As Profit Rises

Recent analyst reports have kept a positive stance on China Hongqiao Group (SEHK:1378) after the aluminum producer reported higher revenue and net income versus last year, along with disclosures on raised connected party procurement caps.

Despite the strong earnings update, China Hongqiao Group’s share price has fallen about 31% year to date and is down 12% over the past three months. Long-term total shareholder return over five years of 173% points to earlier, much stronger momentum that now looks to be fading in the short term as investors reassess growth prospects and risk around the latest developments.

Scan how China Hongqiao Group compares with other metals producers by reviewing the hand picked 9 top copper producer stocks that are reacting sharply to shifts in demand and pricing across the materials sector.

Bulls point to rising revenue, stronger profit and a steep year to date share price decline. Bears focus on governance questions and connected party dealings. Which side does China Hongqiao Group’s current valuation really support?

Price-to-Earnings of 7.2x: Is it justified for China Hongqiao Group?

On a simple headline measure, China Hongqiao Group trades on a P/E of 7.2x, which screens as inexpensive compared to both peers and the broader Hong Kong metals and mining space.

The P/E ratio compares the current share price to earnings per share. For an aluminum producer like China Hongqiao Group, this yardstick reflects how much investors are currently willing to pay for each unit of profit given its earnings record, sector exposure and perceived risk around governance and funding.

China Hongqiao Group carries a 7.2x P/E versus an industry average of 11.2x and a peer average of 34.3x. That is a steep gap. The fair P/E estimate of 10.9x sits meaningfully higher than where the stock trades today, which indicates a level the market might move toward if current profit quality, return on equity and earnings trajectory remain consistent with expectations.

Explore the SWS fair ratio for China Hongqiao Group.

Result: Price-to-Earnings of 7.2x (UNDERVALUED)

Still, connected party procurement caps and ongoing governance concerns could affect how investors view China Hongqiao Group’s earnings quality and the current valuation gap.

Find out about the key risks to this China Hongqiao Group narrative.

Another View on China Hongqiao Group’s Value

The P/E story is only one angle. Our DCF model suggests China Hongqiao Group, at HK$23.52, trades well below an estimated future cash flow value of HK$82.69. That points to a very large implied discount. Is this a genuine opportunity or just compensation for higher perceived risk?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out China Hongqiao Group for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 252 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Mixed signals around China Hongqiao Group’s valuation, risks and governance can feel messy, so move quickly to inspect the underlying numbers and form your own view. Then weigh both sides by checking the 4 key rewards and 1 important warning sign.

Looking for more investment ideas beyond China Hongqiao Group?

Once you have formed a view on China Hongqiao Group, do not stop there. Broader context from other opportunities can sharpen your next move and help you act with more confidence.

• Target resilient value by reviewing the 252 high quality undervalued stocks that combine quality fundamentals with prices the market may be under appreciating.
• Strengthen your income stream by scanning the 165 dividend fortresses that offer higher yields backed by solid underlying businesses.
• Limit downside risk by checking the 309 resilient stocks with low risk scores that focus on sturdier balance sheets and steadier financial profiles.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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